As good in practice as it looks on paper? What the EU-China investment agreement will mean for European businesses
In December 2020, the EU and China agreed in principle on a Comprehensive Agreement on Investment (CAI) following seven years of negotiation. Looked at from both a geopolitical and a business perspective, the deal is undoubtedly important. And while ongoing or new political tensions may impact progress towards ratifying the deal in the short-term, the bigger picture is that this deal is the culmination of seven years’ negotiation, so there’s a strong sense of hope that it won’t be discarded.
Geopolitically, it is a major demonstration of the EU exerting its strategic autonomy – its own policy response to the “America first” stance of the Trump Administration and China’s “Made in China 2025” plan. Furthermore, the deal gives China public recognition and a competitive boost after several years of experiencing deteriorating relations with some of its main trading partners. The EU has reaffirmed its openness to Chinese companies provided certain conditions are met.
In addition, the deal has important implications for businesses. It should create new opportunities for European companies in sectors such as electric vehicles and private hospitals, by giving them greater access to the vast and fast-growing Chinese market and fairer treatment so they can compete on a more level playing field within China. Joint venture and domestic equity requirements will be removed in automotive, environmental services, financial services, health and a range of business services. China has also pledged to improve transparency on government subsidies in services sectors and agreed to stop forced technology transfers. Some elements of the agreement, including access to the services sector, are multi-lateralized, which means all foreign investors in China should benefit from them.
Since the EU has traditionally been open to foreign investment, Chinese companies will benefit from limited improvements in access to the EU market under this agreement. Nevertheless, Chinese investors are expected to be able to pursue more opportunities in Europe’s bulk and retail energy distribution sector.
The deal also includes an open-ended commitment from China to some sustainable development principles. China has agreed to effectively implement the Paris Agreement on climate change and the International Labour Organization (ILO) Conventions that it has already ratified. It has also agreed to make continued and sustained efforts to ratify the ILO fundamental Conventions on forced labor.
What’s the real impact?
On paper the deal looks good, but what difference is it likely to make to the EU in practice? Will it be a driver of much-needed growth at a time when Member States’ economies are battling to recover from the COVID-19 pandemic? The short answer is that while the agreement is certainly an encouraging development, China hasn’t opened up its entire market to EU businesses. It’s just opening up a few select sectors. And while the exact details of the deal have not yet been published, we do know that European companies still won’t have the same rights and guarantees, when it comes to investing in China, that Chinese companies have when investing in the EU.
The reality is that the deal is unlikely to generate a large amount of additional foreign direct investment into Europe, either. Apart from anything else, the EU will use its “strategic autonomy toolbox” to protect its market and companies from unfair competition and dependence on foreign actors. Still, the deal should stimulate some activity by giving Chinese investors greater confidence in the European business climate. Furthermore, the recent EY Europe Attractiveness Survey suggests that Europe is viewed increasingly favorably by foreign investors in general. As the data indicates there has been an almost threefold increase in investors believing Europe will be a more favorable investment destination post the COVID-19 pandemic, climbing from 8% in April 2020 to 21% six months later. This probably reflects a sense of optimism about Europe’s ability to bounce back quickly.
Overall, it’s reasonable to assume that the CAI will have a modestly positive impact on European growth going forward. The deal will not come into effect before 2022, however, and has yet to be approved by the EU Council and the European Parliament, while some MEPs have raised concerns that agreement undermines the EU’s credibility on human rights.
Going forward, the CAI has implications for the global trade landscape more broadly, including the competitiveness of the US. In 2019, the EU was China’s biggest trading partner while China was the EU’s second-largest trading partner. Goods worth over €1.5 billion were traded each day during that year. The new agreement once ratified should further strengthen that trading relationship, boosting the GDP of both China and the EU, and driving global growth. The EU is committed to having strong relationships with all its trading partners. Hence the CAI could be the basis for cooperation and a more sustainable international business environment in future.